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23

Jun

2020

Reform and the Structure of the Indian Economy

Written by: Madhusudan Datta

 
 

The Indian economy traversed a rising growth trajectory for three decades since the turn of the 1970s. It has been observed that growth came mostly from the service sector. The question that haunted economists is: can the service sector of an underdeveloped country maintain such momentum when manufacturing fails to get charged up in spite of all reforms aimed at this objective?

Reform and the Structure of the Indian Economy delves into the pitfalls in value added accounting of sectoral growth. Growth of gross value added in a sector can systematically deviate from that of final expenditure (and gross output) ascribable to the sector, while maintaining the broad national accounting identity between their economy-wide aggregates.

The unconventional pattern of growth in India is about the observation that the share of manufacturing remained stagnant since the early 1980s, even defying the comprehensive reform of the 1990s. On the contrary, the service sector showed great dynamism.

In a limited segment of the sector high-tech activities in communications and information technology related activities have charted phenomenal growth thereby helping the sector’s growth to some extent. But the major activities like distributive trade, transport and finance, collectively referred to as Service-I, experienced sustained and rapid growth throughout the period under study. These services derive their demand from activities mostly in the manufacturing and, more generally, the industry sector. So, a stagnant manufacturing sector is not supposed to support thriving Service-I activities. The apparently paradoxical development in India’s sectoral GDP growth trend has been explained in the book in terms of uneven technological progress between sectors and the related trend in relative prices.

A stagnant manufacturing raises concern regarding the growth of knowledge stock in the economy. This concern is assuaged by the basic finding in the study that the manufacturing sector in India, in spite of its many weaknesses, really has not been stagnant. It grew as much as service-I but, indeed, not in terms of sectoral value added due to general decline in relative price of manufactures over decades.

This finding gives a new perspective to the story of India’s economic growth since the turn of the 1970s. The analysis should be of interest to all students of the Indian economy. The Cambridge University Press has brought out the book with its characteristic efficiency and care.

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About the Author: Madhusudan Datta

Madhusudan Datta is Professor of Economics at Kalyani University, India, and teaches macroeconomics and mathematics-for-economists at the undergraduate and postgraduate levels. He has been ICSSR Senior Research Fellow and works on structural change, productivity studies, national accounts, economics of the tertiary sector, and measurement issues....

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